Payroll vs Luxury Tax

The Nats roster for 2019 is a mystery right now. All we know is that the Nats would like to get under the luxury tax threshold for next year, which stands at 206 million. They wanted to do it this year but even with the sell-off couldn't quite make it so in January they will be paying a tax.

The tax they pay won't be a lot. Much like the U.S. income tax, you pay based on the money made in each bracket, not the overall amount you make. In baseball there are only two brackets, under and over, and the under pays no tax. The over pays an increasingly larger amount 20% then 30% then 50% depending on how many years they've been over in a row. It resets once you get back under. So for an example if the luxury tax threshold is 200 million and the amount of yours that counts against the luxury tax is 210 million and this is your first year over you would pay 2 million dollars

(210-200) * 0.20

If it was your second year you'd pay 3 million, if your third or more 5.

The Nats will barely squeak over the tax so even though this marks year number 2 going over they are going to pay 30% on some small number. A couple million over maybe so a few hundred thousand in taxes. A lot for us, not that much for the Lerners.

If it's not a lot why do the Lerners want to be under so badly? The WaPo covered this pretty well a few weeks ago. Money saved is money saved. You get that tax amount reset in case you want to spend more later. You get better compensation for free agents leaving. The system is set up to try to get teams not to spend much, and it works for the most part.

Where do the Nats stand for next year? The luxury tax is not as simple as the amount paid out because it includes numbers we aren't really privy to and it doesn't care about your deferred money. For most teams that's not going to be a big deal. For the Nats it's everything.

Let's take Scherzer's contract. He signed a 7 year deal for 210 million total. It wasn't just salary. It was 160 in salary and 50 million in signing bonuses. Salary has to be defined within the years of the contract and Scherzer's was 10, 15, 15, 15, 35, 35, 35.  (2019 is the first 35 year). Even though they need to be defined like this they don't have to be paid like this and the Nats, as you know have deferred a bunch. Max's actual salaries are 10, 15, 15, 15, 0, 0, 0 (end of contract), 15, 15, 15, 15, 15, 15, 15. This would suggest that Max is getting paid nothing this year but that's not true. The contract stipulates the 50 million is to be paid out as such 5, 0, 0, 0, 15, 15, 15.

You can see here what the Nats did in effect. They gave Max a 15 million dollars a year for 14 years.

But neither the payroll (I guess for actual tax purposes) or the luxury tax sees it this way. For payroll Max is making what is defined in the contract - originally noted as 10, 15, 15, 15, 35, 35, 35, with the deferred amounts adjusted for reduced value** plus the 50 million spread out over those 7 years. that's 7+ million a year so it ends up being like 17, 22, 22, 22, 37+, 36, 34+

Luxury tax is easier as it has an equal value for each year. For Max's contract that would be 28.7 million. But as you may notice that 28.7 million times 7 years doesn't get you anything. Not the original value 210 million, nor the adjusted present-day value of like 190 million if you add up those payroll numbers. It's kind of like a half-way point between the two but I don't know. It uses a different methodology to calculate the annual salaries.

Anyway I'm getting in the weeds here. Max and Stras themselves cost like 54 million toward the luxury tax. Zimm and Eaton's AAV adds another 17. Doolittle himself, if I have this right, will throw in 6 million (the entirity of his option - which isn't factored into AAVs because it's not guaranteed) Kendrick 3.5. That's 80+.  Arbitration guys - which include Rendon - add their annual salary about 30 million. Let's say 110. So do the pre-arb guys, another couple million. 112? Someting like that. Let's say 110-115. Then you factor in medical benefits (yep this is part of it and no I don't know exactly but 15 million is a conservative high-end guess) so 125-130 is set.  The Nats have 75-80 million to spend for next year while still being under the threshold.  Could you fit Bryce and other fixes? Yes.

If Bryce's AAV is 30 then you have another 45 or so to spend. But that adds up quick. A very good starting pitcher (think Kuechel or Corbin), a catcher (Grandal) and you are already at 35 ish without doing anything to a pen that's just Doolittle. Can you fix hat for 10 million? AND the Zimm back-up that costs you a few million each year the last two years but you definitely needed?  You get really close. And the thing is - if you are close and you start picking people up at the trade deadline? Those costs come back at you. So if they want to be under AND want to have any flexibility for late season moves they have to stay a good 10 million under. This means Corbin-Grandal becomes Happ-LuCroy.

Assuming the bench and pen costs about 15 million to just fill with decent talent and you want that cushion you have 50-55 million to play around with to finish up this team. This is what the Nats are looking at going into the off-season.



*Why do a signing bonus instead of just paying him like this? I don't know. Some sort of tax thing probably. 

** what does this mean? It means that MLB says - well given inflation you aren't paying him 105 over those last three years it's more like 87 - and if we adjust that for each year depending on when you pay them out exactly you get salaries of 30+, 28+, and 27+  so 10, 15, 15, 15, 30+, 28+, 27+